Aurelia Butler

“The US will fall into a recession in late 2024 or early 2025,” they wrote, citing data from their kinked Phillips curve framework.According to BCA, the framework suggests a nonlinear relationship between inflation and unemployment. When unemployment is high, firms can hire workers without significantly increasing wages.However, once full employment is reached, companies can only grow their workforce by attracting employees from other firms, which triggers a cycle of rising wages and prices. This wage-price spiral can only be halted by reducing aggregate demand, typically through tighter monetary policy.“The reason the US avoided a recession in 2022 and 2023 was because the economy was operating along the steep side of the Phillips curve,” strategists wrote.“When the labor supply curve is nearly vertical, weaker labor demand will mainly lead to lower wage growth and falling job openings. In other words, an immaculate disinflation,” they added.In line with its views, BCA is now tactically underweight on equities, after turning bullish last year and neutral earlier in 2024.As a result, strategists expect the S&P 500 stock market index to drop to 3,750 during the next recession.“Such a drop would bring the index back to where it should be based on our estimate of the net present value of future earnings,” strategists wrote. More

In its quarterly inflation report, the central bank bumped its 2024 economic growth forecast to 2.3% from the 1.9% predicted in March.According to the central bank, the move followed a more robust economic performance in the first quarter, accompanied by a drop in unemployment and rising wages. Although last month’s historic floods in Brazil’s southernmost state of Rio Grande do Sul have caused a significant economic downturn in the region, policymakers said signs of recovery were already visible. In the report, they emphasized that their inflation projections – now at 4.0% for this year, 3.4% in 2025 and 3.2% in 2026, against an official target of 3% – were primarily increased due to stronger-than-expected activity, which led to a change in the estimated output gap. The central bank indicated last week that the output gap, a measure of the supply-demand economic balance, was now “around neutrality” compared to slightly negative previously, meaning it no longer saw slack in Latin America’s largest economy. Earlier this month, the bank held interest rates at 10.50%, interrupting an easing cycle after it reduced borrowing costs by a total 325 basis points since August.According to policymakers, higher inflation projections were also influenced by increased market inflation expectations, currency depreciation, short-term projection inertia and a higher neutral interest rate.They had previously disclosed that the neutral interest rate, which neither stimulates nor cools economic activity, was raised to 4.75% from 4.5%.Policymakers also noted that inflation in the three months to May was 14 basis points higher than expected, mainly due to pressure on food prices. The same factor led to a revision of their expected inflation for June to 0.33%, from 0.15% previously. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The number of foreign direct investment projects in the UK has fallen to a near 12-year low, fuelling concerns about overseas investors’ appetite for the country in the run-up to the general election next week.Some 1,555 FDI projects landed in Britain in the fiscal year that ended in March 2024, according to data published by the Department for Business and Trade on Thursday. The figure was down 6 per cent on the previous fiscal year and 31 per cent below the peak in 2016-17, the year of the Brexit referendum. It was also the second lowest figure recorded since 2011-12, when there were 1,406 new projects. Software and computer services remained the strongest sector for FDI but registered the biggest year-on-year decline, with new projects falling 31 per cent to 263.Foreign investment is a key driver of growth in productivity and living standards, but the number of new projects in the year to March was little higher than the 1,538 registered in 2020-21, the first year of the pandemic, when travel and business activity were heavily restricted.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Nigel Driffield, professor of international business at Warwick Business School and FDI research theme lead at the Productivity Institute think-tank, said “high government uncertainty has made things worse”. “For the past 40 years, Britain’s value proposition to inward investors was that it was a bridge between Europe and the rest of the world,” said Driffield, adding that he now expected investors to “be focused on the UK market rather than exporting to the EU”. The UK is seeking to attract more inward investment after the US and EU launched ambitious programmes in the form of the Inflation Reduction Act and NextGenerationEU. The IRA, signed into law by President Joe Biden in 2022, offered almost $370bn worth of tax breaks, subsidies and grants to clean energy developers, which have encouraged fresh investment in the US. Adopted in 2020, NextGeneration EU is an €800bn joint borrowing scheme to help the bloc build a greener and more digital economy.A UK government-commissioned review into boosting FDI last year urged ministers to adopt the strategic state-backed approach of the US and European government in wooing overseas investors. Lord Richard Harrington, the Conservative peer who led the review, also recommended appointing a cabinet-level minister to co-ordinate across Whitehall. He described central government departments as too often “disorganised, risk-averse, siloed and inflexible”.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The estimated number of jobs created by FDI fell 10 per cent year on year to 71,478, the figures from the business department showed on Thursday. The annual fall in project numbers in the year to March reflected a widespread decline across sectors, type of investment and country of origin. Project numbers were down for new investment, expansion of existing investment and mergers and acquisitions. The US, the largest overseas investor in Britain, generated 10 per cent fewer FDI projects than in 2022-23. India, the second-biggest investor, registered an 8 per cent fall. Financial services, the second largest sector for FDI, recorded a 16 per cent year-on-year decline. But investment projects in renewable energy were up 12 per cent. The Harrington review, which was published in November, showed that FDI capital spending on wind farms had lifted the UK’s FDI figure in recent years but warned of “limited potential for spillover benefits”.Joe Marshall, chief executive of the National Centre for Universities and Business, said the new data painted “a worrying picture”, noting the impact of the decline in FDI “on jobs and the signals this sends about the attractiveness of the UK’s innovation system”. “Boosting investment will be critical for the next UK government to grow the economy. Research and innovation are global endeavours, and FDI is a key component that is vital to sustained growth,” he added. More

Usage of the repo, which allows banks to temporarily borrow cash from the BoE in exchange for government bonds they hold, has climbed steadily since March. The repo was launched in October 2022 by the BoE to ensure overnight interbank lending rates stay close to its official Bank Rate while it drains cash from the financial system through its quantitative tightening bond sales.The central bank is reducing its bond holdings by 100 billion pounds a year and cancelling the cash reserves it receives for them, after buying 875 billion pounds of bonds between 2009 and 2021 with newly created cash.Governor Andrew Bailey said in a speech last month that he did not view rising usage of the short-term repo as a sign that Britain’s financial system was close to the minimum level of reserves which banks wanted to hold.Bailey said this “preferred minimum range of reserves” was probably between 345 billion pounds and 490 billion pounds. Current reserves held at the BoE stand at around 760 billion pounds.Once reserves fall to their minimum level, the BoE was likely to need to expand its market operations and rethink the pace of asset sales, Bailey said.($1 = 0.7905 pounds) More

ORLANDO, Florida (Reuters) -As President Joe Biden and former President Donald Trump prepare to face off in the first of the 2024 presidential debates, the gulf between Americans’ downbeat view of the U.S. economy and its general healthy well-being could not be wider.A year after the Federal Reserve’s most aggressive interest rate hiking campaign in four decades, the economy is in remarkably good shape – unemployment has not been this low for this long since the 1960s, real wages are rising, and GDP growth is above trend.Wall Street, not always the Democrats’ most natural ally, seems to agree – a potentially transformative boom in tech is in full swing, equity volatility and credit spreads are historically low, and the stock market has never been higher.So why is Wall Street’s view not shared by Main Street? Surveys consistently show Americans are pessimistic on the economy at large, and a Reuters/IPSOS poll this week showed Trump beats Biden 43% to 37% on who has a better approach for the economy.The answer definitely has a lot to do with inflation, and probably a bit to do with political polarization widened by social media-fueled populism, misinformation and fear-mongering.”The macroeconomic story is strong. But there is a huge disconnect between reality and people’s perceptions, which points to a lot of misinformation about the economy,” says Heidi Shierholz, the president of the Economic Policy Institute in Washington.”It’s that one-two punch of high price levels from the burst of inflation, and misinformation,” she adds. POLARIZATION The effect of ‘higher-for-longer’ inflation on people’s perceptions cannot be overstated. A working paper titled “Why Do We Dislike Inflation?” that was published in March by Stefanie Stantcheva, a professor of political economy at Harvard University, shone a bright light on the economic, behavioral and emotional damage people feel that inflation inflicts.The paper, built on a seminal study in 1997 by Robert Shiller, found inflation is “deeply rooted in its perceived impact on (people’s) financial well-being and the broader economy,” is distributed unevenly, and exacerbates inequality.Minneapolis Fed President Neel Kashkari told the Financial Times earlier this month that he’s hearing increasing anecdotal evidence that people would rather have a recession than high inflation – if they lose their job, they can get help from friends or family, but everyone is affected by inflation.That idea goes against academic studies that show recession and unemployment are more painful than rising prices. Danny Blanchflower, a professor at Dartmouth College and a former Bank of England rate-setter, estimates a rise of 1 percentage point in the unemployment rate lowers well-being by more than five times as much as an increase of 1 percentage point in inflation.Stantcheva’s paper, meanwhile, also highlighted “the distinct polarization in opinions on inflation based on political affiliation,” which is no doubt wider today than it was in 1997.Asked who or what is to blame for current inflation, the replies were instructive. Republicans were twice as likely than Democrats to blame “Biden and the administration,” “Monetary policy” and “Fiscal policy,” with 41% of Republicans citing these three factors, versus Democrats’ combined 21%.’SYSTEMATIC BIAS’Yet although inflation is still above the Fed’s 2% goal, it is not far off it. Indeed, the steep decline in inflation from the post-pandemic peak near 10%, as measured by the consumer price index, has boosted average real wages, which have now been growing for more than a year. An EPI study in March found that real hourly wages for the lowest 10% of earners grew 12.1% between 2019 and 2023. In the same period, middle-wage workers experienced 3.0% real wage growth, while the wages of the top 10% of earners grew just 0.9%.This apparent disconnect between people’s personal attitudes to inflation and the wider aggregate picture is to a certain extent mirrored in people’s perceptions of their personal financial well-being against the nation’s.A recent Gallup poll showed a slight uptick in the “Personal Financial Situation Index” last year, in how people felt versus a year earlier and how they see themselves in a year’s time.But Americans’ current assessment of national economic conditions slipped to the most negative since November, and has been negative nearly every single month since March 2020. What gives?Research published by the Brookings Institution earlier this year found that “biased sources of information” and a “systematic bias in driving inaccurate perceptions about U.S. economic performance” in the media are partly to blame. While this may not be an entirely new phenomenon, it helps explain why many people wrongly believe the U.S. economy is in recession and why consumer sentiment “appears to be divorced from the macroeconomy.”(The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Paul Simao) More

TOKYO (Reuters) – The Bank of Japan is conducting a survey of Japanese government bond market participants over the central bank’s bond-tapering plans, three sources familiar with the matter said on Thursday.The survey is expected to be used as a basis for discussions at the BOJ’s meetings with bond market participants on July 9-10, said the sources, who declined to be identified as the matter is private.The BOJ decided to start tapering its huge bond buying and reduce its holdings which, at 589 trillion yen ($3.7 trillion), make up roughly half of total Japanese government bonds (JGB) sold in the market.It has said it would hold the meetings with bond market participants before deciding details on how it plans to reduce its huge bond purchases in the next one to two years.The survey is asking the market participants, including banks, brokerage houses and life insurers, about their expectations over the range and pace of tapering, the sources said.Asked by Reuters, the BOJ confirmed it is contacting all the participants of the upcoming meetings to collect their views on the amount, pace and framework for the planned reductions.The diminishing presence of the BOJ heightens the need for the government to find stable buyers of JGBs and avoid a bond selloff that could trigger a damaging spike in yields. A finance ministry panel has called for an environment where government bonds remain an attractive investment for financial institutions, such as by issuing shorter-duration debt. More

LONDON (Reuters) -Banks in the European Union could be inflating the value of the high-risk debt used to plug gaps in capital buffers intended to provide protection in the event of a crisis, the bloc’s banking watchdog said on Thursday.Banks began issuing so-called Additional Tier 1 (AT1) bonds, also known as contingent convertibles or CoCos, to bolster capital after the global financial crisis.The bonds convert into equity or are written off if a bank’s capital drops below a certain level.There have been clashes between buyers of the debt and banks, most recently when Credit Suisse AT1 debt amounting to about $17 billion was written down to zero when the ailing lender was forced to merge with UBS, triggering lawsuits.The European Banking Authority (EBA) said it has investigated how banks issue AT1 bonds and set out its findings in a report on Thursday that included new templates to better standardise information on such bonds and more accurately reflect their worth.The aim of the guidance is to limit the room banks have to introduce bespoke tweaks when issuing AT1 bonds.”Some provisions could be worded in a better way because, as originally proposed, they may be the cause of uncertainty in relation to regulatory provisions — for instance on the effectiveness/implementation of the loss absorption mechanism — or they may increase the already high complexity of the instruments,” the EBA said.The authority noted differences between the “carrying” value of the bonds recorded on a bank’s balance sheet under accounting rules and their “nominal” value.”Measuring non-CET1 capital instruments for prudential purposes using the carrying amount (accounting value) is necessary to prevent overestimation or underestimation of the total capital available to cover losses,” the EBA said.”For the calculation and reporting of regulatory capital ratios, it is essential that capital instruments consistently reflect their actual loss absorbency capacity.” The EBA’s findings show how much importance regulators are placing on examining the level of capital banks have at their disposal when they are in trouble, said Chris Woolard at accountancy firm EY.”The industry can almost certainly expect further probes in the short-term, and investors and regulators will be looking for greater standardisation across the banking sector.”Regulators globally are looking at whether the events at Credit Suisse mean that changes are needed to the use of AT1 bonds in capital buffers.The global Basel Committee of banking regulators has said that after banking sector turmoil last year, which included Credit Suisse, there could be merit in assessing the complexity, transparency and understanding of AT1 bonds. More

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